Financial Products to Trade

Forex stands for foreign exchange, and represents the currency market. In such a market, traders buy or sell currencies, betting on the future move of a currency and/or currency pair. For example, if a trader thinks the policy in the United States is about to result in a higher US dollar, then the trader may buy the American currency against other currencies. In doing that, they are trading currency pairs on the Forex market.

Because of stiff competition between brokerage houses, as well as currency pairs there are other products offered for trading. These are intended to widen the range of the products offered, and to keep traders involved and active all the time.

The Dashboard of a Forex Broker

For the reasons mentioned above, the dashboard of a Forex broker is quite diversified, and this is a good thing from a money management point of view. Besides currency pairs, commodities and indexes are offered too, as well as Contracts for Difference (CFDs). Let’s discuss a bit about the money management that should be part of a complex trading plan. By the time the account is funded, a good diversification tactic will be to split the trading amount among the various financial products or categories the broker offers.

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Following the above logic, the Forex market will have a specific portfolio, commodities will have another one, and so on. It can be that over a period of time the Forex part of the trading account incurs losses but the indexes part makes a profit, and in this way the trading account rebalances. This is what diversification in a trading account is. However, it is only possible if the Forex broker offers these other products, and if the trader has the knowledge to trade those markets too, as they move based on different principles than the Forex market.

Currency Pairs

Being a Forex broker, the bulk of the financial products offered are currency pairs. There are so many currencies in this world that are moving daily that the broker needs to pair them all. Not all of them move in the same manner or direction, though, nor are they affected by the same factors. For this reason, a typical Forex broker lists only popular currency pairs: the ones that are traded by people, and therefore have a high liquidity.

Imagine if a broker did not list the EUR/USD pair, which is the most liquid one and the most popular one among Forex traders. That broker would have no chance of surviving, because traders would avoid opening a trading account with it for the sole reason that the currency pair is not offered. The role of the US dollar is key in categorising the currency pairs. The ones that have the dollar in their componence are called majors, and the other ones are called cross pairs. The minor pairs are further split into different categories, but the main idea is that the major and cross pairs are the ones that form the currency pairs offered for trading. Everything else is just details.

Commodities

CommoditiesAny Forex broker offers commodities to their clients. Classical commodities are gold, oil, and silver. If these classical commodities are not part of the broker’s offering, traders are reluctant, as it means the broker has some liquidity issues in the sense that there is no access to such markets. No liquidity providers for these instruments is a bad thing for the broker.

Spreads are different for commodity instruments and currency pairs. In a way, that is only logical, because the financial products are different too. There are different factors that affect the two product types, even though sometimes the markets seem to be correlated. Just to give you an example, imagine that the Canadian dollar (CAD) is strongly correlated with the oil market. This makes the USD/CAD and other CAD pairs move in tandem with oil prices. However, the CAD pairs will move based on the Bank of Canada monetary policy as well, so trading them is more difficult, and requires a lot of time and dedication, as well as resources.

Indices

Indices are nowadays part of any Forex broker’s offering. The main European and American indices are offered for trading, as well as some Asian ones. Markets are correlated most of the time, and move based on different factors. However, when they move they form different patterns that can result in correlated trades being taken.

For example, the Dow Jones Industrial Average (DJIA) is known to have been correlated with the JPY pairs for quite some time now. This means that when the index moves to the upside, the JPY is sold, or the USD/JPY, the main JPY pair, moves to the upside as well. If traders notice a bullish pattern on the DJIA, such as a pennant or a falling wedge, they will focus on the long side on the USD/JPY pair as well. For the record, bullish means that price will move to the upside, and long is the equivalent of buying. In this way, correlations between different financial products lead to a trade on the currency market. This would not have been possible if the DJIA was not offered by the Forex broker.

Besides the DJIA, other important indices offered for trading are SP500, Nasdaq, Russel (in the United States), Xetra Dax in Germany, Cac40 in France, Nikkei in Japan, etc. The way the stock market moves plays an important role in the way the Forex market moves, and this is the main reason why such indices are offered for trading in a Forex account.

Contracts for Difference (CFDs)

CFDs are relatively new products, and they refer mostly to the most popular companies in the world. A contract for difference allows traders to speculate on the share price movements of a company. For example, if one believes that the share price of Volkswagen (VW) is going to increase soon, buying a CFD on that share price is indicated. If indeed price does move to the upside, by the time the trade is closed a profit has been made. This profit is the difference between the entry and the exit prices; hence the name, contract for difference (CFD).

The downside of these products is the fact that they are offered on high commission, and require a lot of margin, which is blocked in the trading account. However, the fact that they are offered is a good one, as they represent just another way to diversify a portfolio. As you can see, all of these product types are part of, or should be part of, any serious Forex broker‘s offering. This article shows only some of the products on offer, but the possibilities are numerous.

For example, on the commodity side, other instruments such as platinum, coal, palladium, iron ore, cotton, cocoa, etc., can be offered. This is only to show you the possibilities out there. Remember as a general rule of thumb that the more products being offered, the better the Forex broker is.

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